Donear Industries - Stock Analysis For Mid-Term Investment

SP Tulsian has recommended to buy stocks of Donear Industries in his stock analysis report. This article is from series "Stocks To Buy Below Rs.50 in 2010"

Donear Industries is into textile and they have a very strong brand Donear Suitings for which Yuvraj Singh is the brand ambassador. The company has set up a new textile plant in Surat with an investment outlay of about Rs 220 crore for which they have gone for a borrowing of about Rs 120 crore. Prior to that it was a debt-free company and it has been doing quite. It had given bonuses in last five-years with a very high promoter stake of 90%, which the stock exchanges has asked them to reduce to 75%.

But since the Surat project of Rs 220 crore, which had gone onstream just six-months back, the company have been providing depreciation on the written down value method while all the listed companies are providing depreciation on the straight-line method. This is was because of the policy having adopted for written down value method. The depreciation burden has been quite high and that has resulted into the net loss.

If the company would have opted to provide depreciation on the straight-line method, there would have been net profit. If you see their H1 performance, they had a topline of close to Rs 115 crore in which Surat project has not contributed much – with a net loss of about Rs 5.80 crore and in this Rs 5.80 crore the depreciation element was at about Rs 17.5 crore. So if I take the cash profit element, the company had posted a cash profit of about Rs 11 crore for six-months on a equity of close to about Rs 10.40 crore.

The share has a face value of Rs 2 and now this Surat project will start contributing to the topline as well as to the bottomline. Maybe, I don’t know what would the logic will be, it may prevail upon the management to opt for the change in the depreciation policy and if they opt to do that – there would be a reversal of depreciation, which can result in a huge write back of the depreciation which can improve the bottomline.

But even if you take on a fundamental basis with a market cap of the company at about Rs 165 crore, as I said the debt is only to the extent of Rs120 crore – this company with an enterprise value of Rs 300 crore is ruling at a very low valuation. Their brand itself has been estimated in the past at about close to Rs 130-140 crore.

There is good upside. We have been seeing renewed interest coming in the textile stocks. I think if someone can take a call on this stock with six months view, one can expect at least 60% return from hereon.

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